DROM: MUNICIPAL DEBT: THE SILENT KILLER
Is your city experiencing a budget crisis? Is your town laying off workers and cutting services? Are local hospitals understaffed and underfunded? Do you worry about whether your child's school will have enough money to provide students with a quality education? If this is happening in your community, you are a debtor.
Over the last forty years, our common goods and resources have been privatized to profit the 1%. In the wake of reduced public funding, cities and towns have taken out more and more private loans to pay for everything from basic operations, like sewers, to large developments, such as sports arenas. Municipalities are forced to partner with Wall Street to tap revenue streams because Wall Street controls access to credit markets. The only way cities and towns can win access to those markets is by issuing tax-exempt municipal bonds. But that means Wall Street profits from those bonds through interest payments and through securitization, as traders repackage bonds into debt bundles which are sold and resold on the global market.
Municipalities issue the bonds and guarantee loans by promising that investors will be repaid with tax dollars or with revenue generated by the debt-funded project. In addition, since the New York City fiscal crisis more than forty years ago, federal bankruptcy code has been revised to ensure that many municipal bonds would keep paying investors no matter the costs to communities. Bonds are supposed to be bets on the future. In most cases, however, there is no way the lender can lose the bet, and cities can lose a great deal. After Wall Street's mortgage-lending practices crashed the economy in 2008, many municipalities were unable to pay their debts.
Bond financing is a weapon of the 1% and mafia capitalism. When Scranton, Pennsylvania threatened to default on a debt payment in 2012, Wall Street came down with an iron fist. It cut off the city's access to money, and Scranton's mayor responded by slashing wages for city workers down to minimum wage. Scranton dared to challenge Wall Street, and a debt crisis ensued. News accounts reported that public employees such as teachers and pensioners were to blame, but this is false-Scranton's brand of American austerity was a direct result of Wall Street greed. From coast to coast, cities have become completely beholden to big banks. The result is shuttered schools, smaller fire departments and block upon block of abandoned homes in foreclosure. Public transportation systems are also cash cows for Wall Street. In NYC, the Metropolitan Transportation Authority loses $114 million per year as a result of a poisonous interest-rate swap with JPMorgan Chase and other big banks. Rather than refuse this debt, the MTA has cut service and laid off workers. Most people who rely on the subway are working-class New Yorkers, including many people of color and immigrants. The 99% is required to fund the lavish lifestyles of the 1%.
Like Scranton, Stockton, California went broke after the housing market went bust in 2008. The result has been a higher crime rate, including murders, robberies and home invasions. When residents call the police, they are never sure if help will come because the police department is stretched to the breaking point. Even CalPERS, the retirement system for California public workers, may not be safe from bondholders demanding payment on defaulted debts. Municipal indebtedness is a tool by which Wall Street demands deep cuts in public spending to enrich investors no matter the cost to communities. Mafia hitmen warn debtors by going around town and breaking a few legs. Wall Street sends the same message: pay your debts, or see what happens.
HOW IS MUNICIPAL DEBT ISSUED?
Bonds for public works are supposed to be approved by voter referendum, yet city officials often broker deals with private partners through backdoor channels to circumvent the democratic process. Officials use political power to zone off "development districts" or declare a parcel of land "blighted" which allows it to be seized under eminent domain and sold off. This means that taxpayers often find themselves stuck with the tab for debt-funded projects guaranteed by city agencies that have no accountability to voters. As one scholar noted, public officials and their Wall Street partners often act as de facto governing bodies "empowered to issue long-term debt without the formal oversight of elected decision makers."
Perhaps the most glaring example of such corruption and graft is in Jefferson County, Alabama.2 In 2011, the municipality filed the largest bankruptcy in U.S. history to contest a $4 billion debt in the aftermath of a sewer project gone disastrously wrong. The story is a familiar one: local officialsborrowed vast sums from Wall Street to pay for a treatment plant, which the EPA said was needed to stop sewage from flowing into the Cahaba River in a predominantly African American community. But the project was never completed because corrupt officials mishandled the funds (seventeen have been jailed since the scandal broke). Lenders demanded repayment anyway, doubling each household's sewer bill in a neighborhood already reeling from poverty, high unemployment and a sewer that still did not work properly. The county's financial trauma has resulted in public service cuts, mass layoffs and overcrowded prisons. Even a federal judge has stated that Jefferson County's debts cannot be repaid.
HOW ARE INTEREST RATES FOR MUNICIPAL BONDS DETERMINED?
Wall Street's criminality reveals that there is no such thing as a free market and never was. We recently learned that interest rates around the world have been rigged for years for the benefit of a few large financial firms. Yet the recent LIBOR scandal is not surprising when one considers that municipal bond-rigging has been going on for decades with no public outcry.
"In May 2011," reads a report from the International Herald Tribune, "UBS [bank] admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution."4 In 2012, Bloomberg News reported that "[s]o far, 13 individuals from banks including Bank of America, JPMorgan Chase and UBS have pleaded guilty in the Justice Department's investigation."
In 2011, GE Capital was caught rigging municipal bonds and overcharging cities and towns across the United States. Their punishment? A $70 million fine, laughably low considering the profits involved.
In his exposé of municipal bond rigging (which he calls "the scam Wall Street learned from the mafia"), Matt Taibbi explained that Wall Street "skimmed untold billions in the bid-rigging scam" from hundreds of municipalities. After they were caught, banks continued investing in city bonds. "Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again," Taibbi wrote. "Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts."
HOW CAN WE RESIST MUNICIPAL DEBT?
Occupy Wall Street makes it possible to imagine that some debts must not be repaid. In Jefferson County, for example, some citizens do not want to renegotiate; they reject such debt outright. As one activist in Birmingham noted, "[the debt] shouldn't ever have been issued, and therefore it shouldn't exist. It shouldn't have been spent. Since it shouldn't have existed, we're not going to pay it."
Some municipalities are fighting back against the big banks. After their pay was cut to minimum wage, Scranton's municipal unions sued the city, and their wages were restored. Years of community resistance delayed the construction of Barclays arena in Brooklyn because the stadium was financed with tax-exempt bonds and built on land seized by eminent domain. Baltimore is suing more than a dozen big banks for manipulating LIBOR, the benchmark for interest rates on many financial products. In July 2012, Boston activists held subway turnstiles open to protest Wall Street's vise grip on their city's transportation budget. After a toxic interest-rate swap deal sent it off a fiscal cliff, Oakland, California is trying to take the dramatic step of severing its relationship with Goldman Sachs for good.8 These efforts will continue and escalate in the months and years to come.
The idea that some debts can and should be refused is a sentiment that is spreading. In Europe, the rallying cry of the 99% is, "we won't pay for your crisis!" In the United States, we can start a municipal debt resistance movement by asking critical questions and demanding answers. Have you ever looked at your town budget? Do you know how your elected and non-elected officials fund public works? Who benefits? Who really ends up paying for what? Simply posing these questions in your community is a way to strike debt. We must also insist that the 1% is no longer allowed to write the laws dictating how our communities will be financed. We must insist on an end to the debt-financing of U.S. cities. This case for ending Wall Street's control over our lives should also be made through direct action. We can target the banks profiting from the corrupt bond market with actions such as sit-ins and marches. The most important thing we can do as occupiers is refute the myth that the 99% are to blame for the fiscal emergencies that are declared when the bond vigilantes come knocking.
Jason Hackworth, "Local Autonomy, Bond-Rating Agencies and Neoliberal Urbanism in the United States," International Journal of Urban and Regional Research, 26, no. 4, 2002 (tinyurl.com/DROMHackworth), 707-725. L. Owen Kirkpatrick and Michael Peter Smith, "The Infrastructural Limits to Growth: Rethinking the Urban Growth Machine in Times of Fiscal Crisis," International Journal of Urban and Regional Research, 35, no. 3, 2011 (tinyurl.com/ DROMKirkpatrick), 477 -503. Gretchen Morgenson, "Police Protection, Please, for Municipal Bonds," New York Times, August 4, 2012 (tinyurl.com/DROMMorgenson). Halah Touryalai, "City of Oakland Taps Occupy Wall Street to Take On Goldman Sachs," Forbes, July 11, 2012 (tinyurl.com/DROMTouryalai). "UBS: Expert in Escaping Prosecution," International Herald Tribune, July 20, 2012 (tinyurl.com/DROMIHT), 8. Travis Waldron, "How the House GOP Budget Would Decimate American Cities and States," Think Progress, August 9, 2012 (tinyurl.com/DROMWaldron). Rachel Weber, "Selling City Futures: The Financialization of Urban Redevelopment Policy," Economic Geography, 86 no. 3, 2010 (tinyurl.com/DROMWeber), 251 -274.
1. Mary Williams Walsh, "With No Vote, Taxpayers Stuck With Tab on Bonds," New York Times, June 25, 2012 (tinyurl.com/DROMWalsh). 2. Steven Church, William Selway, and Dawn McCarty, "Jefferson County Alabama Files Biggest Municipal Bankruptcy," Bloomberg News, November 9, 2011 (tinyurl. com/DROMChurch). 3. Steve Weissman, "A Crisis Worse Than 2008?" Salon, July 25, 2012 (tinyurl.com/DROMWeissman). 4. "UBS: Expert in Escaping Prosecution," International Herald Tribune, July 20, 2012 (tinyurl.com/DROMIHT), 8. 5. Ellen Rosen, "Municipal Bonds, UPS, JPMorgan, Student Loans: Compliance," Bloomberg News, July 23, 2012 (tinyurl.com/DROMRosen). 6. Matt Taibbi, "The Scam Wall Street Learned From the Mafia," Rolling Stone, June 21, 2012 (tinyurl.com/DROMTaibbi). 7. Mary Williams Walsh, "In Alabama, A County That Fell Off the Financial Cliff," New York Times, February 18, 2012 (tinyurl.com/DROMWalsh2). 8. Halah Touryalai, "City of Oakland Taps Occupy Wall Street To Take On Goldman Sachs," Forbes, July 11, 2012 (tinyurl.com/DROMTouryalai).